Fausel v. JRJ Enterprises, Inc.

• Decision Date: 22 December 1999
• Docket Number: No. 98-948.,98-948.
• Citation: 603 N.W.2d 612
• Parties: Stephen A. FAUSEL, Appellant, v. JRJ ENTERPRISES, INC. f/k/a Bloomfield Speedway, Inc., Appellee.
• Court: Iowa Supreme Court

603 N.W.2d 612

Stephen A. FAUSEL, Appellant, v. JRJ ENTERPRISES, INC. f/k/a Bloomfield Speedway, Inc., Appellee.

No. 98-948.

Supreme Court of Iowa.

December 22, 1999.

Jason W. Sapsin and Gene R. Krekel of Hirsch, Adams, Krekel, Putnam, Cahill & Miller, Burlington, for appellant.

Patrick M. Roby and Christopher L. Bruns of Elderkin & Pirnie, P.L.C., Cedar Rapids, for appellee.

Considered by LARSON, P.J., and LAVORATO, SNELL, CADY, and HARRIS,¹ JJ.

LAVORATO, Justice.

Stephen Fausel sued JRJ Enterprises, Inc. for anticipatory breach of contract. Fausel had agreed in writing to purchase JRJ's membership interest in an entity involved in a Colorado casino operation. Following a bench trial, the district court dismissed Fausel's suit. Fausel appealed, contending, among other things, that the district court (1) misconstrued the agreement as requiring him to perform by July 31, 1995, and (2) erroneously concluded that two provisions of the Restatement (Second) of Contracts barred his claim of anticipatory breach. We agree and reverse and remand with directions.

I. Background Facts and Proceedings.

John R. Johnson is a resident of West Burlington, Iowa. His business interests include construction, steel erection, ready mix, and rock quarry. He is also the sole shareholder and officer of JRJ Enterprises, Inc., formerly known as Bloomfield Speedway, Inc. JRJ is a subchapter "S" corporation that manages several car racing tracks in Iowa.

In October 1992, Hawkeye Gaming Ventures Limited Liability Company was organized under the Wyoming Limited Liability Company Act. According to its articles of organization, Hawkeye's purpose was to engage "in the business of constructing, developing and operating a casino in Gilpin County, Colorado." The articles listed five initial members and stated that an executive management committee comprised of three individuals—John Randall Winegard, Larry W. Rheinschmidt, and Patrick A. Haney—were to manage Hawkeye. The articles allowed for the admission of additional members upon unanimous consent of the original members and "subject to the terms and conditions of the Company's Operating Agreement."

Shortly after the formation of Hawkeye, a private offering memorandum concerning Hawkeye was circulated to potential investors. The memorandum stated that part of the proceeds from the sale of membership units in Hawkeye would be contributed to 101 Main Street Limited Liability Company, a Wyoming limited liability company. The memorandum further stated that Hawkeye owned fifty percent of the membership units in 101 Main Street and Main Street Gaming House Partners, L.P., a Colorado limited partnership, owned the other fifty percent. According to the memorandum, 101 Main Street had been organized to develop and operate a casino in Black Hawk, Colorado, which was expected to open June 1, 1993.

At about this time, Winegard and Rheinschmidt approached Johnson about investing in Hawkeye. Johnson committed to invest $875,000 in Hawkeye. In February 1993, an amendment to the offering memorandum was circulated stating that the plans for the casino were changing: the casino would offer fewer slot machines and would scale back customer parking facilities. Because of these changes, Johnson began expressing concerns about the project. He also felt he was not being compensated for his commitment to invest $875,000. Consequently, Johnson held back his investment, an action that brought construction of the casino to a halt. Johnson eventually made the $875,000 investment through his company, JRJ. He followed that with an additional $200,000 investment, for a total investment of $1,075,000, making JRJ Hawkeye's single largest investor.

By June 1994, Johnson became concerned about his investment for several reasons. Construction of the casino was not on schedule, he had to personally guarantee debt so that additional financing for the casino could be obtained, and he had a perception that he had inadequate influence over decisions concerning the casino. These concerns culminated in a letter dated September 8 to Patrick Haney, secretary/treasurer of Hawkeye, in which Johnson stated he wanted to sell his interest in Hawkeye for the amount of his investment: $1,075,000.

Article 10 of Hawkeye's operating agreement provided that, before a member could sell its interest in Hawkeye, the member had to get written consent from two-thirds of the remaining members or allow Hawkeye or the remaining members a right to match any bona fide offer. According to section 10.1, the bona fide offer had to be accompanied by ten percent of the purchase price.

After receiving Johnson's September 8 letter, Haney wrote a letter to Stephen A. Fausel, a potential purchaser. The letter outlined the potential return Fausel might enjoy if he purchased Johnson's interest in Hawkeye. On October 25 Fausel responded with a letter to Johnson outlining an agreement for the purchase of Johnson's interest in Hawkeye. The letter was followed by a document captioned "Agreement for Sale of Stock," (Stock Agreement) signed by Fausel on October 28 and by Johnson on behalf of JRJ on October 31.

The following were the salient points of the Stock Agreement: (1) The purchase price was $1,075,000, payable upon the transfer of JRJ's membership units, with the transfer to take place within ten days of the determination of Fausel's suitability by the Colorado Gaming Division (settlement date); (2) no interest would accrue on the purchase price between the agreement date and the settlement date; and (3) JRJ warranted, among other things, that its units of ownership in Hawkeye were not subject to any restrictions on transferability "except as set forth in the articles of organization and the operating agreement of [Hawkeye]."

In addition, the Stock Agreement provided that Fausel's obligation to purchase was subject to several conditions precedent, three of which are pertinent here: (1) The Colorado Division of Gaming and the Colorado Bureau of Investigation had to approve Fausel without reservation, (2) Hawkeye had to approve transfer of JRJ's units, and (3) Hawkeye had to approve Fausel as a substitute member with full rights of participation in the management of the business and affairs of Hawkeye.

The requirement that Fausel be approved by the Colorado Division of Gaming was apparently rooted in Colorado statutory and regulatory law. Under the Colorado Limited Gaming Act, gaming licenses are issued by the Colorado Division of Gaming. Colo.Rev.Stat.Ann. § 12-47.1-202 (West 1999); Moya v. Colorado Ltd. Gaming Control Comm'n, 870 P.2d 620, 622 (Colo.Ct.App.1994). Any person or entity wishing to hold an ownership interest in a gaming license is subject to investigation and approval by the Colorado Division of Gaming. See Colo.Rev.Stat.Ann. § 12-47.1-201 to -204; Moya, 870 P.2d at 622. The approval requirement applies not only to those who wish to directly hold a license, but also to those who own more than a five percent share of the beneficial interest in companies seeking licenses. See In re Aristocrat, Inc., 973 P.2d 727, 730 (Colo.Ct.App.1999). Therefore, although 101 Main Street actually held the gaming license, Hawkeye, and in turn Hawkeye's owners, were subject to approval by the Colorado Division of Gaming.

Although the record is not entirely clear as to exact ownership percentages, it does appear that Hawkeye owned more than five percent of 101 Main Street and that JRJ owned more than five percent of Hawkeye. As a prospective ultimate owner of a gambling casino in Colorado, Fausel was therefore required to get approval from the Colorado Division of Gaming.

By contrast, approval by Hawkeye was governed by the articles of organization. Pursuant to section 10.1, Fausel's offer would not be considered a bona fide offer unless it included a ten percent down payment. Furthermore, sections 10.1 and 10.2 of Hawkeye's operating agreement required JRJ to give notice of Fausel's offer to Hawkeye and the remaining members. Section 10.3 provided that, if Hawkeye failed to accept the offer within ten days, the remaining members would have ten days to do so. Section 10.4 provided that, if neither Hawkeye nor the remaining members chose to match the offer, JRJ could complete the sale provided three conditions were met: (1) the sale had to be on the terms offered in the notice, (2) the purchaser had to sign the operating agreement, and (3) the sale had to close within thirty days of the time allowed for Hawkeye or the remaining members to match the offer.

If the sale was not closed within the thirty days, section 10.4 provided that JRJ's membership interest would again be subject to all the restrictions of sections 10.1, 10.2, 10.3, and 10.4. Therefore, the deadline for completing the sale and avoiding resubmission of JRJ's interest to Hawkeye and the remaining members would have been approximately mid-December 1994.

Though Fausel did not forward the ten percent down payment as required by section 10.1, Hawkeye and the remaining members nevertheless considered his offer as a bona fide offer. Hawkeye and the remaining members subsequently declined to purchase JRJ's membership interest. Consequently, JRJ was free to sell its interest to Fausel. The remaining members additionally agreed to waive the thirty-day closing requirement in section 10.4. Instead, they gave JRJ until July 31, 1995, to close the sale to Fausel.

At about the time JRJ and Fausel signed the Stock Agreement, two other events were taking place. A casino management enterprise known as "Fitzgerald's" took an option to buy all ownership interests in 101 Main Street, including those of Hawkeye. Fitzgerald's was to operate the casino. Another investment entity known as "Dry Gulch," partly owned by Hawkeye, agreed to purchase an interest in 101 Main Street. All three of these transactions—Fausel's purchase of JRJ's interest in Hawkeye, Fitzgerald's' purchase of all ownership interests in...